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Stocks for Your Golden Years

Let dividend stocks carry you through retirement.

You can see it now: You're walking down cubicle row carrying a box of your favorite coffee mugs, some family photos encased in cheesy picture frames, and a 20-year-old Thermos. Smiling co-workers with years more toil ahead of them pat you on the back. Your boss stands at the end of the row. With a tear-filled gaze, he pumps your hand and tells you how irreplaceable you are, but you know he's actually crying because he can't stand seeing someone leave the company alive. And this gives you even more satisfaction. You walk into the lobby and make your way past security, hoping they don't stop you and discover the office supplies you stashed in your Thermos. Even if they do, nothing can bring you down -- not today. Today you are liberated. You are free. You are retired.

So now what? Well, while running off to Florida in a nice flowery garment may seem attractive, funding the remaining years of your life is probably the best place to start. And that's why dividend-paying stocks are about to become your new best friends.

Say huh?I realize this might surprise some of you. After all, the prevailing wisdom is that bonds are the best friends of retirees. The trouble with prevailing wisdom is that it doesn't change very often, but circumstances do.

It's true that the Fed's interest-rate increases have made bond yields more attractive today than they were just a few months ago. (The yield on five-year Treasuries now stands at about 5%.) But this yield is all you're going to get if you hold the bonds until maturity, and that's just not going to cut it for this luxury-oriented generation of retirees.

Why? What makes you so different from generations past? Well, you had a little more fun in the '60s, and you brought the shame of disco upon us in the '70s, but the more relevant reason is simply this: You're going to live longer.

The miracle of science ...That's right. Not so long ago, folks were lucky to make it to retirement. And not long after that, folks were fortunate to get a good 10 years of shuffleboard in after giving the office the old shove-off. Not so today.

Despite all that '60s fun, this generation of retirees is the healthiest group ever to punch a time clock. If you're a reasonably healthy 50-year-old, it's highly likely you'll live at least another 30 years, and quite possible you'll make it another 40. That's probably more time than you spent working.

... dents your pocketbookWhile that's a phenomenal thing, it also means you have a much greater chance of outliving your nest egg than generations past. To keep that from happening, you'll need more exposure to stocks. They're simply the only investment with returns high enough to maintain most portfolios over that kind of time frame.

"But wait," you say, "I also need income now to fund my retirement." That's true. This is why you don't need just any stocks. You need dividend-payers. They're pretty much the only investment that will serve both of your needs over the long haul.

Again, say huh?OK, you might still be a bit surprised. After all, there's little doubt that the glory days when the average stock in the S&P 500 yielded 5% are long over. Today, that yield stands at a somewhat less impressive 1.7%, which probably leaves you thinking to yourself, "Self, that'll hardly fund a round of golf, much less my retirement years." You have a point. Fortunately for us, we're not relegated to average. A slew of comparatively low-risk firms out there possess the yields of yesteryear:

Company

Market Cap

Yield

Duke Energy(NYSE:DUK)

$26,400

4.4%

General Electric(NYSE:GE)

$344,800

3%

Dominion Resources(NYSE:D)

$25,300

3.8%

DuPont(NYSE:DD)

$38,520

3.5%

Data provided by Capital IQ. Dollars in millions.

The best income investments, however, will generate their tasty payouts while producing double-digit total returns. Again, the combination of growth and income that I seek at my Motley Fool Income Investor service will help you cheat inflation while you're cheating death.

Of course, those willing to step out a little further on the risk curve can spice up their income streams with companies like France Telecom(NYSE:FTE), a European communications company with a current yield of approximately 6%.

The Foolish bottom lineThese types of companies allow you to have your cake and eat it if you want to. In other words, you can take the income they produce now, or you can reinvest it and beef up your future income stream. In all, a dividend-based strategy is the most flexible option available to investors -- be they Gen Xers or Boomers. That's why I put my money where my mouth is.

Of course, if you feel that researching and maintaining a portfolio of individual stocks is a little beyond your skill set, we at the Fool are happy to take the burden off your shoulders. I recommend and maintain a list of the best dividend-paying stocks each and every month in the pages of Motley Fool Income Investor. Be my guest free for 30 days, and you'll gain access to more than 50 thoroughly vetted dividend payers. Whether you choose to join us or not, these recommendations are yours to keep, and the Fool has an absolute satisfaction guarantee.

Fool on!

This article was originally published on April 24, 2006. It has been updated.

Mathew Emmert will probably never retire, but he still loves dividend-paying stocks. He's the advisor ofMotley Fool Income Investor, and he does not own shares of any company mentioned in this article. France Telecom and Duke Energy are Income Investor picks. The Fool has a retirement-proof disclosure policy.